How Is the Distribution of Dividends to Foreign Shareholders Regulated in Indonesia?

Foreign shareholders in a foreign investment limited liability company (PT PMA) are treated the same as shareholders in general. They have the same rights as domestic shareholders as long as they are legally registered as shareholders of the Company. One of these rights is the right to receive dividend distributions.
Dividends are distributed from the company’s net profits, namely the net profit for the relevant financial year after deducting accumulated losses from previous financial years and after allocating mandatory reserves. The distribution of dividends is determined by a resolution of the General Meeting of Shareholders (GMS) and may only be carried out if the company has a positive retained earnings balance, unless the GMS decides otherwise.
In distributing and paying dividends to foreign shareholders, taxation aspects must be carefully considered. Therefore, it is necessary to first determine the tax status of the dividend recipient. Article 111 point 1 of Law No. 6 of 2023 in conjunction with Article 2 paragraph (3) letter a of Law No. 36 of 2008 concerning the Fourth Amendment to Law No. 7 of 1983 on Income Tax stipulates that:
• Foreign nationals are classified as domestic tax subjects if they reside in Indonesia, are present in Indonesia for more than 183 days within a twelve-month period, or have the intention to reside in Indonesia in a given tax year.
• Foreign nationals are classified as foreign tax subjects if they do not reside in Indonesia or are present in Indonesia for no more than 183 days within a twelve-month period. Foreign tax subjects may derive income from Indonesia either through a Permanent Establishment or without a Permanent Establishment.
Accordingly, foreign tax subjects are parties that earn income from Indonesia but do not meet the criteria as domestic tax subjects and are therefore subject to income tax under the provisions applicable to foreign taxpayers. Dividends paid to foreign taxpayers that are not attributable to a Permanent Establishment in Indonesia are subject to a withholding tax of 20% of the gross amount. This withholding applies to certain types of income sourced from Indonesia, including dividends, and is imposed by the party distributing the dividends at the time the dividends are paid, made available for payment, or become due and payable. The country of domicile of the foreign taxpayer is determined based on the party that is the beneficial owner of the dividends. The 20% withholding tax rate may be reduced if a tax treaty exists between Indonesia and the country of domicile of the dividend recipient.
Nevertheless, dividend distributions must be carried out prudently and in strict compliance with applicable corporate and tax regulations, namely that dividends must be sourced from net profits and approved by a valid resolution of the General Meeting of Shareholders (GMS). Any distribution of dividends that does not meet these legal requirements, as well as any failure to properly withhold dividend tax, may give rise to legal consequences and tax sanctions for the Company. Accordingly, the Board of Directors bears responsibility for ensuring that dividend distributions are conducted in compliance with prevailing corporate and tax laws.